Unfortunately, the most recent offering earlier this year from the High Court (the Saint Gobain case below) doesn’t lay down any additional hard and fast rules. If anything, the waters are even muddier than they were before. The comments made in this case ought to set alarm bells ringing for suppliers and professional consultants too, as limitation clauses that are routinely used by suppliers in many industries have been struck out by the courts and deemed to be unreasonable and consequently ineffective.
International Decorative Surfaces ("IDS") raised an action for recovery of the price of goods that it had supplied to Hillmead - but Hillmead counterclaimed for sums of around £367,000, alleging that laminate sheets that IDS had supplied were defective. The laminate sheets were to be fabricated into bonded panels for installation at a number of Primark stores and complaints were raised at store level that they had mottling that affected their aesthetic appearance. The £367,000 figure claimed related to diversion of staff time and loss of business - in other words, the types of losses often considered to be indirect or consequential.
The claim was dismissed on the facts, because the Court found that the laminate sheets were not defective.
Routine limitation clauses found to be not reasonable - and therefore ineffective
Although the case was dismissed on the facts, the court did consider four particular clauses and ruled that all of them were not reasonable - in terms of the Unfair Contract Terms Act 1977 ("UCTA") - and were therefore ineffective.
The UCTA provides that any clauses seeking to exclude or limit liability must satisfy the requirement of reasonableness with regard to the circumstances which were in the contemplation of the parties at the time the contract was made.
Duty to inspect
IDS' terms included an obligation on Hillmead to inspect the goods on delivery and to notify IDS of any visual defects within 3 working days of delivery. In all such cases, IDS would be under no liability unless they had been given an opportunity to inspect the defects and their obligation would be limited to replacement of the defective products only.
This term was not only considered to be unreasonable but was noted as being a draconian consequence to flow from a minor failure such as a failure to inspect in such a short timescale. The key consideration here seemed to be the fact that all liability was excluded when there was such a failure and that it wasn't reasonable to pass all such risk on to the buyer, when the seller too had an opportunity to inspect the goods before or on delivery.
Liability limited to replacement of the goods or their invoice value
The court decided that it was unreasonable to limit liability to just the costs of the sheets. The parties were deemed to be aware at the time that the contract was made that the direct loss to the buyer would be greater than the cost of replacing the goods. This was because IDS knew that the sheets that they were supplying would be fabricated into bonded panels so that a defect in the sheets would result in Hillmead incurring the costs associated with replacing the panels and not just the sheets.
This conclusion may come as a surprise to many, as the fact that such additional losses were in the contemplation of the parties is likely the very reason that such an attempt to limit liability was made in the first place.
The unequal bargaining position of the parties was considered to be a factor here - IDS was about 50 times larger than Hillmead, on the basis of turnover.
Consequential loss exclusion
IDS' terms excluded liability altogether in respect of a host of types of losses, including for loss of profit, indirect loss and consequential losses. The lost business and staff time that comprised the claim were likely to be categorised as consequential.
Such an exclusion is common in supplier contracts and in construction contracts generally.
The key considerations here were that:
- the parties were not of equal bargaining power;
- the term was not negotiated;
- the clause sought to exclude all consequential losses rather than to impose a financial limit; and
- the fact that such losses were in the contemplation of the parties pointed to the conclusion that it would not be reasonable to seek to exclude them altogether, given the seriousness of the consequences for the buyer.
Excluding the implied term of satisfactory quality
Again, the bargaining position of the parties seems to have been a key consideration in coming to the conclusion that it was not reasonable to exclude the implied term of satisfactory quality contained in the Sale of Goods Act 1979.
Also of relevance was the fact that the implied term as to quality was not replaced by a different form of warranty as to quality or fitness for purpose. The court reached this conclusion in spite of the fact that IDS had, in effect, provided a warranty that the goods would be free from visual defects.
What can we take from this case?
As it was ultimately decided on the facts that IDS were not liable, it may be that the court thought it had more latitude than normal to discount the standard terms limitation and exclusion clauses upon which IDS sought to rely. Some may also take comfort from the fact that the court's comments about the clauses were unnecessary relative to the disposal of the case - and so do not create any binding precedent.
However, those who seek to rely on standard terms which exclude or limit liability should keep the following points in mind:
- Clauses seeking to exclude all liability are much more likely to be considered unreasonable than those that merely restrict or cap liability.
- If specific losses or undertakings are to be excluded, offering an alternative remedy might increase the chances of the exclusion being effective.
- If there is to be a cap on liability, the more appropriate the level is in the circumstances, the more likely it is that the cap will be enforceable. There are no clear rules as to what is appropriate, but in this case limiting liability to the price of the goods was not reasonable, as it was evident to the parties that likely losses in the event of a defect would exceed the price of the goods.
- Finally, the bargaining position of the parties is a particularly relevant factor when assessing reasonableness. Weaker commercial parties are likely to be afforded a greater level of protection against onerous exclusion or limitation clauses.
Might it be time to revisit those standard terms?